Another statement from the Chancellor, another failure to recognise the looming crisis in local government spending. It’s less than a week since the National Audit Office issued its report on the financial state of local councils, which even the LGA acknowledged was a ‘stark’ warning. But although the LGA says the government must ‘urgently address’ the funding gap, complaining that councils face a cliff-edge, the Chancellor obviously believes that most councils will simply put the brakes on and avert a catastrophe, and if a few overshoot the cliff-edge he can blame it on their incompetence.

The NAO report shows that councils are in a hard game of robbing Peter to pay Paul. Councillors know that, come what may, they have to try to keep social care functioning, the bins being emptied and the streets lit at night. Some of these services have even seen a small increase in funding (children’s care has been increased by 3.2% in real terms). The consequences for other areas of council work are indeed stark, and housing is one of them.

The report shows that spending in two areas – planning and development and housing services – fell respectively by almost 53% and 46% in real terms over the period 2010/11-2016/17. These two broad service areas have been those hit hardest by reductions in funding under the coalition and Tory governments.

But these figures hide even bigger falls in some aspects of those services. For example, spending on housing-related support has fallen by 69%. Many of these services met a range of needs, including those of homeless clients. Of course they include several services that help people in groups that the government claims to prioritise, such as those with mental health problems or who are victims of domestic violence. They provide the help that numbers of people need to sustain their tenancies and avoid homelessness. Spending on private sector renewal is another victim – it has been cut by 63%. Development control – which among other things helps secure a flow of housing land for new building – has suffered a 53% cut. Expenditure on temporary accommodation, however, has rocketed by 57%, because most councils that don’t have enough homes for the homeless are inevitably often forced to place them in high-cost private lettings.

Councils will soon face higher costs, because they will take on a new set of obligations when the Homelessness Reduction Act takes effect in April. The legislation is welcome, but massively underfunded: some £61 million is being allocated outside London and £11 million in the capital. No one thinks this is enough.

Council housing, in the meantime, as not been subject to the same cuts because it is paid for entirely from tenants’ rents. But of course it has been pushed to absorb more and more costs of services that should be paid from general funds, with tenants seeing service reductions as a result. Councils can hardly be blamed for looking for ever more ingenuous ways to cross-subsidise services but neither should tenants be expected to be complacent about what their rents are used for.

One leader of a local government body, Jonathan Carr-West of the Local Government Information Unit, has spoken up: ‘Councils are running out of money fast’ he says, ‘We have already seen one county council go under and others may soon follow unless the government takes action now’. The LGA wrings its hands and urges the government ‘to provide the financial sustainability and certainty needed to protect the local services our communities rely on’. John McDonnell got it right when he said in response to the Chancellor, ‘We face – in every public service – a crisis on a scale we’ve never seen before… Our public services are at breaking point and many of our local councils are near bankruptcy’. He criticised the ‘indefensible spectacle’ of a chancellor ‘failing to lift a finger’ to help struggling local authorities. From Philip Hammond the looming catastrophe brought not a single word.

In a new departure for Red Brick, we are publishing a ‘long read’ briefing paper rather than the usual blog post. It’s been researched and written by Ross Fraser, who has become a regular contributor to the site. He wanted answers to some basic questions about Offsite Manufactured Housing and to find out whether some of the claims for it – on cost, speed of delivery, quality, environmental impact – stood up to scrutiny.

In his conclusion, he asks what approach an incoming Labour government, committed to an expansion in housing supply in general and genuinely affordable housing in particular, should take to OSM – because some people see OSM as making the difference between success and failure.

Although significantly longer than our usual blogs at over 3,000 words, we hope you find this briefing format useful. We hope it helps stimulate debate about a key issue that the housing industry has to address over the next few years. Steve Hilditch

By Ross Fraser

Can offsite manufactured housing (OSM) play a key role in solving the housing crisis by ensuring that new supply targets are met?

Why the construction industry crisis threatens new supply targets

The government has set a ‘new supply’ target of 300,000 homes per year. Labour has adopted a similar target, with the proviso that it must include 100,000 social homes per year. The GLA has set a target of 90,000 new affordable homes over five years. Other regionally devolved administrations have also set ambitious new supply targets.

Under normal circumstances, these targets would be challenging. However, there is growing concern that the construction industry will be unable to meet this demand if it is primarily reliant on traditional building techniques.

The construction sector crisis takes three forms:

low productivity and rising cost

housebuilding methods haven’t changed much in 150 years and productivity has flat-lined

build costs are 24 times higher in 2015 than they were in 1971 (a real-terms increase of 1.78)

this is largely because homes are hand-built, using labour intensive methods, in largely uncontrolled conditions

materials costs are still rising, partly due to shortage of bricks, as are skilled labour costs for reasons explained below

an acute skills shortage in the housebuilding industry

the average age of the construction workforce is increasing – the industry is likely to lose 620,000 domestic workers (c25% of current labour) to retirement by 2026 (source: Farmer Review 2016)

the industry is struggling to replenish this loss of capacity with new entrants – partly because all-weather outdoor working is not attractive to many

the past and current shortage of labour has forced building firms to increase the proportion of tradespeople from abroad, often at higher wages, thus increasing the cost of traditionally-built homes

much of the EU construction labourforce is likely to depart post-Brexit

major construction projects such as Crossrail or HS2 can absorb large proportions of the available workforce

There is a growing body of opinion that the new supply targets cannot be met without innovation in the construction supply chain – through the adoption of Offsite Manufactured Housing (OSM).

Proponents of OSM argue that it can increase the productivity and cost of construction, improve the thermal efficiency of new homes and reduce the environmental impact of development. The DCLG White Paper notes that:

“industry reports suggest homes constructed offsite can be built up to 30% more quickly than traditional methods and with a potential 25% reduction in costs.”

Proponents of OSM suggest that there are four markets where OSM may have a major role to play:

speculative volume build – by major developers, for sale

custom build – by owner occupiers, often on small sites

Build to Rent – by institutional investors, for long term rent

social rented or shared ownership housing – councils and housing associations seeking to build at scale often with no or minimal grant subsidy

The GLA recently noted that in the only two post-war periods when mass public housing took place, OSM played a key role:

post-1945 prefabs – low rise with gardens

mid-60’s to mid-70’s systems-built construction – particularly on council estates and tower blocks

OSM is an umbrella term for a system of house building that relies on individual components being ‘manufactured’ in a factory, transported to a site and mostly, or entirely, completed and assembled on location. OSM is sometimes referred to as MMC (Modern Methods of Construction) modular housing or precision manufactured homes.

Offsite manufacturing is distinguished from ‘traditional’ building methods that rely on ‘linear construction’, where each stage of construction takes place on site and must be completed in sequence before the next phase of building can take place. Offsite construction allows most of these phases to be undertaken simultaneously. While site preparation, foundations and utility connections are being prepared, whole completed housing units are being built in a factory ready for final assembly and finishing in situ.

OSM housing comes in many different forms. Generally, there are five main categories used to classify the various construction systems:

Volumetric or modular (three-dimensional units produced in a factory, fully fitted out before being transported to site and stacked onto prepared foundations to form dwellings)

Panellised (flat panel units built in a factory and transported to site for assembly into a three-dimensional structure or to fit within an existing structure)

Hybrid (volumetric units integrated with panellised systems)

Sub-assemblies and components (larger components that can be incorporated into either conventionally built or factory-built dwellings)

Non-offsite manufactured element (innovative methods of construction used onsite and the use of conventional components in an innovative way).

3. What are the benefits of OSM?

Collectively, the BSA, DCLG and LGA cite the following benefits:

Speed of construction

speeds construction by allowing building works to take place in parallel – as opposed to sequentially when traditional methods of construction are applied

speed of construction enables housing providers to realise a rental return earlier than in normal development – thus reducing the cost of development finance and overall risk

Reduced cost/risk

further reduces cost/risk by reducing reliance on the availability of skilled trades, mitigating the impact of adverse weather – and by minimising the cost of materials

lighter weight of OSM homes means they can be built on hard-to-develop sites more easily than traditional construction and require shallower, cheaper, foundations

Environmental benefits

environmental benefits from a reduced number of material site deliveries and the fact that OSM homes are generally more energy-efficient than traditional construction. (There is some evidence that any reduction in construction traffic will apply primarily to smaller OSM homes – larger homes cannot be transported for on-site assembly in a single journey)

Quality of design

designing for manufacture is increasingly assisted by technology, including Building Information Management (BIM) software and parametric design. Digital construction enables the high quality that distinguishes OSM housing from its prefabricated predecessors

OSM will create factory-based design and assembly jobs which are more attractive to new entrants than on-site all-weather traditional construction roles

What are the risks of OSM and can they be mitigated?

None of the three reports examines the risks of OSM in any detail. And none reflect on the tenant experience of living in the OSM-produced council estates built in the 1960’s/70’s, set out definitively in Lynsey Hanley’s ground-breaking book Estates.

A balanced assessment of the potential of OSM requires policy makers and providers to reflect on the following issues:

Safety

innovation carries risks, which are accentuated by the challenge of taking any product to the scale where cost efficiencies can be realised – e.g. quality control, shortage of qualified installers, etc.

poor site assembly can undermine environmental benefits and safety

OSM structures have a reduced carbon footprint by using less concrete and steel in favour of (primarily) timber components – but is timber (as some fire safety experts claim) latently less fire-resistant than concrete and steel?

Design

will space and other design standards be compromised in favour of cost and volume?

a Manufactured Housing Design Code is required to secure economies of scale – but how feasible is this, particularly until the findings of the Grenfell Inquiry are known?

OSM benefits are based on identical design. This may not be an issue in terms of custom-build or small infill developments – but if applied to larger social housing estates will this create an instantly-recognisable and quickly stigmatised form of housing like the systems-built estates of the 1960’s and 1970’s?

full OSM is better-suited to the construction of buildings of up to 4/5 storeys than high rise. It can however play a role in high rise (e.g. bathroom/kitchen pods)

Durability

how durable are OSM structures? The BSA report suggests that modern OSM methods are “so new that there can be little or no historical data demonstrating how they will weather and the likely lifespan they will have”

housing maintenance professionals have reported higher maintenance costs on previous OSM housing compared to traditionally-built homes. What evidence is there that modern OSM construction will easier and cheaper to maintain?

Procurement

what has gone wrong with the government’s Accelerated Construction Programme? What does this tell us about the capacity of OSM construction? (see below)

can collective procurement processes be developed which share risks and prioritise quality rather than reduced cost? For example, can the Manchester deal (see below) be resurrected – there is understood to be an appetite to do so?

Finance and assurance

lenders are still cautious about the higher requirement for money up-front under OSM and by concerns about the durability of the dwellings

Marketing

can and should government back a marketing campaign to help improve understanding of OSM and remove the current stigma some associate with it?

Can these risks be mitigated?

Proponents of OSM argue that parametric design and/or BIM software can design-out the problems of earlier forms of OSM construction. More evidence – certainly than can be found in the BSA, DCLG and LGA reports – is required to support this encouraging assertion.

The lending industry, responding in part to BSA exhortation, has set up the Buildoffsite Property Assurance Scheme (BOPAS) – a quality standard certification, ten-year warranty insurance scheme based on a risk-based detailed inventory of the performance of OSM-constructed homes – all accredited by the Lloyd’s Register.

BOPAS is intended to assure lenders, surveyors and valuers about the durability and maintenance costs of OSM construction and has the backing of BSA, CML, RICS, the developer Countrywide, lenders including Nationwide, Lloyds, Santander and RBS and insurers the Lloyds Register and Legal and General.

BOPAS is developing an accreditation scheme for quality OSM manufacturers, with 16 suppliers already accredited and around 20 currently seeking accreditation. The GLA considers that the success of BOPAS is “crucial in instilling confidence in the sector”.

5. Why has adoption of modern OSM been limited so far and how can its growth be stimulated?

The GLA Planning Committee notes some key impediments to the viability of OSM, including:

OSM is not cheaper unless procured at scale

optimum efficiency will rely on UK-based OSM factories – but they need confirmed orders at scale to become viable

lender and valuer conservatism about funding OSM – due to concerns about durability and longevity

public conservatism about OSM safety and durability – due primarily to documented failures of 1960/s and 1970’s system-built construction – has meant that the UK lags behind other nations in exploiting the potential of OSM

There are also some other reported challenges within the industry, including the (relatively) long lead-in periods required by manufacturers and a request to be paid up front in some instances.

Nonetheless, there is clear evidence of emerging private sector interest.

Notably, Berkeley Homes – the UK’s largest luxury property developer – is committing to 20% offsite construction and has announced a new factory in Ebbsfleet which will build 1,000 homes a year. L&G has invested £55 million in an OSM factory in Leeds which has the capacity to supply 3,000 homes a year – L&G is a major institutional investor in Build to Rent. Laing O’Rourke has set up its own offsite-factory and has received £22m of government grant to accelerate the use of OSM in housebuilding. SIG has developed a factory in Alfreton. Smaller players include Vision Modular Systems, which has a factory near Bedford. The custom-build industry is embracing OSM.

However, on its own, the private sector will not create an order book of 100,000 new OSM homes a year – the industry’s estimate of the critical mass required to sustain the development of the OSM industry and ensure that its output is cheaper than traditional forms of construction.

It is becoming clear that this target can only be achieved with the assistance of large scale procurement by councils, housing associations and ALMOs. In the social housing sector, commitment to OSM is at an early stage but innovative organisations have been active in looking at OSM as a solution, including:

However, Manchester’s joint OSM consortium with other Greater Manchester Councils and housing associations was unable to progress in 2017 despite having selected sites and a partner. Your Housing has recently pulled out of a joint venture with Chinese investors, which was intended to lead to six OSM factories in the UK. Commercial risks for the private sector partners and the associated terms they demanded to address them are understood to be at the heart of the breakdown of both these deals.

Further action is required.

The BSA report seeks to persuade lenders, valuers and building insurers of the reliability of OSM. Amongst other recommendations, the BSA proposes:

that the government backs the BOPAS 10-year warranty on OSM construction to provide reassurance to lenders

In its White Paper, the Government committed to:

stimulate the growth of this sector through our Accelerated Construction programme and the Home Builders’ Fund

support a joint working group with lenders, valuers and the industry to ensure that mortgages are readily available across a range of tested methods of construction.

consider how the operation of the planning system is working for modern methods of construction (MMC) developments

work with local areas who are supportive of this type of manufacturing to deliver growth, provide jobs, and build local housing more quickly, and

alongside the Home Building Fund, consider the opportunities for offsite firms to access innovation and growth funding and support for them to grow

However, the government appears to be struggling in its attempt to boost OSM via targeted allocation of its Accelerated Construction Fund (ACF) and through its support for Custom Build. The £2billion allocated to the ACF in the 2016 budget was then cut by £1bn in the 2017 budget and to £690 million in the 2018 Budget.

The GLA Planning Committee calls on the London Mayor to:

promote the use of OSM – particularly in the build-out of GLA-owned land, particularly TfL-owned sites

work towards defining and adopting a Manufactured Housing Design Code to drive a more standardised and aggregated demand profile

announce a further round of his Innovation Fund that is specifically focussed on OSM that would reflect the funding needs to support OSM developments

set up a London-specific OSM led procurement framework

The Mayor has responded by promising to:

set out in his London Housing Strategy how he will support a move to precision-manufactured housing and address some of the challenges faced by the OSM industry

provide funding for OSM homes via his Approved Housing Programme and his Innovation Fund and in strategic partnerships with housing associations

negotiate with government for a share in the Accelerated Construction Fund, on a flexible basis, to further support precision-manufactured housing in the capital

for the new London Development Panel to include experts in precision-manufactured homes

Conclusion: what should an incoming Labour government do about OSM?

Proponents OSM argue that the government’s new supply target of 300,000 per year cannot be met without the use of OSM methods. As the BSA report notes:

“utilising offsite construction methods offers a way of providing well designed, high quality, affordable homes at a faster rate than is currently possible. If the UK doesn’t diversify its housing supply, the imbalance between supply and demand cannot practically be broken.”

The scale of the housing crisis, and the likely inability of traditional construction supply to respond, demands that OSM is developed as a viable at-scale option for future construction. Proactive steps are urgently required.

However, caution in industry, social housing and in the lending, surveying and valuation sectors will only be overcome by compelling evidence that the mistakes of earlier forms of OSM construction will not be repeated.

What we build now will last a very long time. The recent review of 50 Years of the English Housing Survey points out that 97 per cent of houses that existed in 1967 are still in use (albeit in a different pattern of tenure). Looked at another way, 60 per cent of stock we now have is more than 50 years old. There is little or no evidence to date that OSM construction will last at least 60 years.

Mistakes in housing policy tend to be long-lasting. The first post-war housing minister, Nye Bevan, said:

Today saw the launch of research on social rent policy commissioned by SHOUT, ARCH and the LGA and undertaken by the independent macroeconomic research organisation Capital Economics. The full report can be found here.

The idea of the research was to get an expert assessment of the options available for setting social rents in the future – so there can be a proper debate given the chaotic position of the current government, which first decided to cut rents for five years (designed to reduce the housing benefit bill, but only in the short run as more people are pushed into private renting) then decided to increase them by more than (consumer price) inflation.

There have been very few attempts to take an overview of all the implications of rents – to tenants, to the social security bill, and to the ability of providers to invest in the existing stock and new homes. There are even fewer attempts to examine the implication of rent policy at regional level – one size does not fit all and it is time rent policy reflected the very different conditions that apply in the different parts of the country.

The report sets the context for social housing in this country, contrasting the social sector ‘target rent’ regime that has been in place for 15 years with the current government’s ‘affordable rent’ regime which sets rents at up to 80% of local market rents. It emphasises why rents matter:

to the disposable income of tenants (linked to benefits policy) whether in work or not, to future investment where rent income has a surprisingly large impact on the ability of landlords to invest.

to the government’s fiscal position because significantly less housing benefit is needed to support a tenant living in social rented accommodation compared private rented housing – where a large slice goes to the profit of the landlord rather than being recycled into investment.

to the business plans of social landlords because rents not only pay for management and maintenance but also service existing debt and underpin future borrowing for investment.

Capital Economics considered the long term impacts of various policy options taking account of the above factors and concluded that a policy of raising rents by CPI plus 1% is broadly appropriate across most of the country, but that no single policy is optimal across the whole country. It is important to note their caveat – the modelling depends on various assumptions coming to pass, notably that the benefit cap and local housing allowance rates increase in line with rents. Under such conditions, tenants on benefits will suffer no loss in disposable income due to the proposed ‘optimal’ rent increases, although tenants who are not in receipt of benefit would see a negative impact.

London and the south east, where private rents are highest, would see the largest fiscal saving from being able to move tenants from private rented housing to new social housing. They calculate that a real annual increase of 1.9 per cent after 2020 would enable sufficient social homes to be built to house all housing benefit claimants in private rented accommodation.

The report includes a detailed assessment of the position in each region. For example, for the north east, higher social rents would facilitate greater house-building, enabling 4,000 private tenants to move to social housing at ‘CPI +1%’, rising to 48,000 at ‘CPI +3%’. However, the increase in the cost of benefits to cover these higher social rents would largely offset this, and the overall impact of different policies on government finances would be minimal.

So the overall conclusions reached by Capital Economics are:

It was right to conclude that an annual cut in rents was unsustainable;

A single national policy should be replaced by regionally-based assessments, with different rates of increase in different areas;

A rent increase policy is only sustainable if there are corresponding increases in benefits and cap levels;

And finally, that rental income is only part of the story in terms of generating more investment – it is vital that government resumes grant for social housing and allows councils to borrow for HRA development, subject to the prudential code.

The report raises some crucial issues for the sector and it is rare to see anyone try to link the issues of tenants’ disposable incomes, benefit costs and investment together in such a coherent way. I would have liked to have seen more consideration given to the implications of ‘affordable rent’. Although social rented homes remain the biggest segment of social housing by far, that is not true of the additions to the stock over the past few years, and the process of ‘conversions’ (switching homes from social to ‘affordable’ rents when they become vacant) has had a huge impact over the past few years. As more than 100,000 homes have been ‘converted’, it would be interesting to know what effect that has had on disposable incomes, benefit costs and investment using the Capital Economics model.

But the biggest challenge, whatever the logic of the analysis and the assessment of what is most optimal, is the question posed by SHOUT’s Martin Wheatley at the launch of the report:

“How do you explain to a hardworking low-income tenant that their rent needs to rise above inflation every year, shouldn’t government be investing in new social housing?”

As the Conservative chair of the LGA, Lord Gary Porter, made clear at the report launch: we have to let the state build and dispel the myth that state intervention is subsidy – it’s not, it’s investment in an asset, a security, and not just a debt.

Why did the number of homes let at social rents fall by 150,000 in the last five years? Surprisingly, although right to buy was a big factor, it wasn’t the biggest. From April 2012 until the same month in 2017, right to buy led to 55,000 council houses sales and 20,000 by housing associations (the latter is because of the ‘preserved’ right to buy kept by tenants if their homes are transferred to a new landlord). So half the net loss can be explained by such sales.

But there were two much bigger factors behind this recent assessment by the Chartered Institute of Housing of the losses in social rented stock. First, new build would easily have offset right to buy sales if output of social rented homes had continued at the same rate as in the previous four years: from 2008/09-2011/12, thanks to the investment made under Labour’s National Affordable Housing Programme (NAHP), 142,000 social rented homes were built, over 35,000 per year. Had this continued, social landlords would have built two new homes at social rent for every one sold, even after right to buy was ‘reinvigorated’ with bigger discounts from April 2012. As it is, the Tories are clearly poised to fail in their much more limited promise to replace the extra houses sold as a result of the right to buy being ‘reinvigorated’, and of course the replacements are all likely to be let at higher, ‘affordable’ rents.

Nevertheless, some new homes are being built for social rent. Adding together new homes built by housing associations and by local authorities, these total just over 50,000 over the five years. Not only is this far lower than achieved under Labour’s NAHP but numbers are now down to only 5,000 per year, with little prospect of their being revived. So in mathematical terms the biggest reason for the loss of social rented homes is failure to build: if Labour had still been in power, continuing a similar programme to its NAHP, around 125,000 more social rented homes would have been built than has been achieved by the coalition/Tory governments.

So selling off the stock wasn’t the biggest reason for the loss of social rented homes, it was the failure to build. Oddly enough, right to buy wasn’t even the second biggest reason. The candidate for this status can be seen in the graph. From 2011 onwards, the coalition government set out to make a heavy dent in the provision of social rented housing in two ways. First, as we have seen, it built homes for ‘affordable’ rent instead of social rent, constructing about 90,000 up to April 2017. But second, it converted homes from social rent to ‘affordable’ rent at an even faster pace, with 102,000 conversions in total by the same date (shown purple in the graph, the green columns show the total AR stock from conversions plus new build). It forced associations to do this to give them extra rental income, to offset the loss of government grant (it fell from around £60,000 per new home built under Labour to less than £20,000 under the Tories). This is therefore easily the second most important factor in the decline of social rent.

Right to buy, whether for councils or housing association properties, is therefore the third biggest factor. But even this isn’t the whole story: both councils and housing associations have been demolishing social rented stock (for example, in regeneration schemes), and these losses run at around 4,000 per year.

In addition to these recent attacks on the social rented stock, it faces two more potential dangers: the new right to buy for housing association tenants, and the enforced sales of ‘high value’ council properties. At the moment, the first of these is only going ahead as a pilot scheme in the West Midlands, and will be funded by government. But the prospect of enforced sales of council houses, now less likely after the Grenfell Tower disaster, is still ‘on the books’ and is inhibiting many councils from taking on more ambitious investment plans. If right to buy for association tenants were to go ahead across the country, someone would have to fund the discounts and at the moment the only money potentially available is from forcing councils to sell off their better stock.

In this situation, Labour’s priorities should be clear: not only does it need an even more ambitious new build programme than it had when it was last in power, but this needs to focus strongly on building for social rent, as John Healey has promised. And the haemorrhaging of the existing stock must be halted too. This will mean, first, either suspending council tenants’ right to buy or at the very least making the discounts they receive much less attractive; second, rescinding the promise to housing association tenants that they can buy their homes and calling off ‘high value’ council sales; third, ending the conversion of properties to higher rents and, finally, ensuring that any regeneration schemes provide for at least one-for-one replacement of any social rented homes that are to be demolished.

By Dave Treanor*

The business model on which housing construction is funded is broken. It is slow to respond to rising house prices by increasing the supply of new housing, and stalls at the first sign of a downturn in the housing market. At the heart of the problem lies a failure in the market for potential building sites.

Construction companies have responded to the unpredictable nature of our planning regime by acquiring land banks so as to ensure a steady supply of sites to develop. Land banking enables them to increase their market share in housing construction and limits the supply of new housing from competitors that might undermine the prices they can obtain. As a result, the availability of building sites barely responds at all to rising house prices.

Developers profit far more from speculative gains in land values than the construction of housing. The reason is quite simple: if property prices rise by more than the cost of construction that increase flows through to the value of the land, which rises in price by far more than the housing. The corollary is also true: if property prices fall land prices will fall by a far greater amount. That is what happened following the financial crash, putting many out of business and allowing the stronger firms to buy out the weaker ones, largely to benefit from their land banks.

In a rising market why sell today when the land will be worth more tomorrow? In a falling market the bigger construction companies consolidate their control over potential building opportunities. It is never in their interests to release newly constructed homes at prices below those they expected when they secured the land several years previously, or in sufficient quantities to lower the prices being paid.

Much of Europe and some parts of the USA and Australia tackle this by levying an annual tax on the value of land, making land banking less profitable. There are lessons to be learned from previous attempts by Labour governments to tax these speculative gains.

Betterment Charge in 1947

Labour first introduced a ‘betterment charge’ in the 1947 Town and Country Planning Act. The right to development was made a state monopoly, and the increase in value resulting from planning permission was taxed at 100%. This was seen as politically more acceptable than the nationalisation of land. Landowners responded by holding on to sites in the expectation that the Act would eventually be repealed, which it was when the Conservatives were elected in 1951.

Land Commission Act in 1967

Labour had another go with the Land Commission Act of 1967. This empowered local authorities to acquire and hold onto land so that it could be subsequently developed, capturing the resulting gains. This worked well with quite a few councils actively engaging in land assembly to promote area regeneration. It also introduced a ‘betterment levy’ charged at 40% of ‘net development value’ calculated as the increase in land value resulting from the development. The result of the levy was much the same as with the previous betterment charge: it cost nothing to hang on to the land, which invariably increased in value by far more than any holding costs. The supply of sites dried up and the Act was repealed as promised by the next Conservative government in 1970.

Development Land Tax in 1976

A Development Land Tax was introduced by the Labour government in August 1976 through the Community Land Act. This taxed development gains on the disposal or ‘deemed disposal’ of land. It was levied at 80% of the gains realised. The Act included 94 pages of complex calculation with numerous exemptions and allowances. The Conservatives promised to repeal it; but they were willing to go along with the Development Land Tax if it was nearer 60% instead of 80% to 100%. When they came to power in 1979 they initially reduced it to 60% and then Nigel Lawson abolished it in his 1985 Budget[1].

S106 of 1990 Town and Country Planning Act

It was the Conservatives who introduced section 106 of the 1990 Town and Country Planning Act. The idea was to capture some of the increase in value when planning permission was granted, and use this to fund the inclusion of affordable housing in the development and improvements to local transport infrastructure and schools to deal with growth in the local population.

The Greater London Council under Ken Livingstone made very good use of this to leverage additional social housing in London. The last Labour government incorporated it into the grant funding regime for social housing. It achieved many of the same objectives as the earlier failed policies, and with a little tweaking to deal with some of the abuses that have crept in it could continue to work well.

Following the financial crash in 2009 housing construction ground almost to a halt. The big construction firms, which are amongst the largest donors to the Conservative Party, persuaded the government that the only way to get house building going again was to boost demand with lower interest rates, ‘Help-to-Buy’ schemes, and by reducing the obligations on which planning permission was granted. All that achieved was to increase house prices, while construction remained in the doldrums. In the four years before ‘Help to Buy’ new house building in London averaged 42,392 a year. In the four since ‘Help to Buy’ it fell to 35,274 per year. London house prices rose 48% since it was introduced in 2013.

S106 negotiations are based on a financial viability appraisal to assess how much affordable housing a site could sustain whilst remaining profitable to develop. These assessments were politicised by the Coalition Government (under Eric Pickles) which introduced a six-year window whereby developers were encouraged to use the viability assessment mechanism to challenge s106 agreements made prior to the financial crash. It established 20% as the profit a developer could reasonably expect to make.

Part of the problem is that a council’s negotiating position is open to public scrutiny while the financial viability assessments used by developers to argue for a reduction in the requirement are treated as commercially sensitive. This really is nonsense: only the owner of the land could benefit by applying for planning permission and they do so without competition from any other developer who might be able to offer more affordable housing. The truth is it strengthens their negotiating position if the council’s calculations are public and theirs are kept private.

A number of planning authorities now require developers to openly publish any viability assessment they use to argue for a reduction in s106 obligations. Under the London Mayor’s Supplementary Planning Guidance (SPG), instead of local authorities having to prove a scheme is viable with 35% affordable housing, the developer has to justify where it is not. Any development has to be profitable, but if a developer overpays for a site by discounting the requirement to include affordable housing, that is their problem. The aim is for the requirement to provide 35% affordable housing to be fully reflected in land prices. The obligation can only be challenged where the value added though granting planning permission is insufficient to fund the affordable housing requirement. The planning gain against which this is assessed is the difference in Existing Use Value with or without the change in planning status, and not the price the developer paid for a site.

Once viability assessments are opened up to public scrutiny planning authorities will be in a position to benchmark the assumptions being used against comparable schemes elsewhere, introducing a genuine element of competitive pressure into the negotiations.

Land Value Tax

Land value tax is widely seen by economists and housing experts as the most effective solution in the longer term, and was recommended by the Mirrlees Review on reforming the UK tax system. It would replace council tax and business rates with an annual tax on the value of land, based on its potential use in accordance with a Local Plan. It would be levied on the residual value of the land net of the construction cost of any buildings. It is more progressive than Council Tax, and could lay the foundations for a shift towards taxing wealth.

The council tax regime is dated and ripe for change. But any change to the system of raising local taxes is fraught with difficulties, and many previous reforms have floundered. There would be a number of practical challenges to overcome as well as the political risk from ‘winners and losers’ created by the change.

A report to the London Assembly recommended enabling legislation that would allow a planning authority to trial the introduction of Land Value Tax so as to flush out and deal with the difficulties. This was reflected in the Labour Manifesto for the last election which said “A Labour government will give local government extra funding next year. We will initiate a review into reforming council tax and business rates and consider new options such as a land value tax, to ensure local government has sustainable funding for the long term“.

Dave Treanor

*Dave researched ‘Housing Policies in Europe’ having retired from M3 Housing and the National Housing Maintenance Forum, where he produced development appraisal systems and the NHF Schedule of Rates. This is his first piece for Red Brick.

Notes

1. The economist V H Blundell put the failure of these measures down to:

Being too complex and riddled with anomalies and unintended side-effects

A failure to incentivise landowners, provoking resistance and inertia, discouraging development and leading to the hoarding of land

The big mistake was to levy it on development rather than as a general tax on land value.

2. Dave Treanor: ‘Housing Policies in Europe’ 2015 available as a book or a free download here.

Yesterday, 19 January 2018, Karen Buck MP sought a second reading of her private member’s Bill, the Homes (Fitness for Human Habitation and Liability for Housing Standards) Bill.

After a long an interesting debate, with support from all sides of the House, the Bill was given an unopposed second reading and now has a good chance of becoming law. Below is Karen’s speech, slightly reduced to take out interventions from other MPs.

It explains the background to the Bill and its purpose and will be of interest to most people involved with housing. The speech is taken from the ‘They Work For You’ website, where the whole debate can be found.

Karen Buck MP in the House of Commons at 12:00 am on 19th January 2018.

I beg to move, That the Bill be now read a Second time.

Everyone deserves to live in a safe, warm and comfortable home, yet despite the undeniable progress made over many decades, millions of people—often the most vulnerable—still do not. Currently and extraordinarily, landlords have no obligation to their tenants to put or to keep the property in a condition fit for habitation. There is an obligation on the landlord to repair the structure of the property and to keep in repair features such as heating, gas, water and electricity, but that applies only when something is broken or damaged; it does not cover issues such as fire safety, inadequate heating or poor ventilation causing condensation and mould growth. There is a whole range of fitness issues that seriously affect the wellbeing and safety of tenants and about which tenants can do nothing.

We must await the results of the inquiry into the horror of Grenfell Tower before reaching any conclusions, but we know that residents were raising fire safety concerns in respect of the cladding long before the fire. This cladding was, as far as we know, in good repair but may have been unfit and hazardous—something certainly was—yet the residents had no legal route available to them to pursue their concerns.

The Bill will modernise the housing fitness standard, and it will extend to cover almost all tenancies—private, housing association and council. It will allow tenants to take action on their own behalf in the same way and on the basis of the same standards as local authorities currently can and give them a remedy that so many of them lack.

Members of Parliament are all too familiar with bad housing. Most of us, at one time or another, have found ourselves responding to constituents living in the most appalling conditions that their landlords, public or private, cannot or will not act to resolve. As an inner London MP whose constituency includes areas that have been notorious for poor housing, dating back to the era of slum landlords such as Rachman and Hoogstraten, this issue has always been very dear to my heart.

When such cases come to me—I will mention them in moment—my first port of call is often the environmental health department. While my council is of a different political complexion from me and we fight like ferrets in a sack on most issues, I can truthfully say that environmental health rises to the occasion again and again. I must have referred more than 1,000 cases to it over the years, and it has acted with vigour and professionalism, yet we know that that action is not sufficient.

I have seen a couple with small children living in two rooms of what was in effect the attic of a property in north Paddington. They lived and slept in one room; in the other, the tiny kitchen, toilet and shower were just cubicles built into the same space. I have seen a family who have had to close off two bedrooms—their only bedrooms—because of the cold and damp, and who all slept in the living room because they were unable to use the entire property. I have met a young mum who had to bring home her baby, who was born prematurely, to a flat that was so damp that even I, when I visited her, struggled to breathe. Only two weeks ago, I met a pensioner who was taken into hospital with hyperthermia twice because of the cold in a flat from which the heat leaks through badly designed windows. Incidentally, she also fell and hurt her hip on steps that had been turned into a virtual river as water poured through a hole in the roof.

A good example of how fitness and disrepair are distinct and different elements of unfitness comes from an estate—a lovely and popular estate—in Bayswater in my constituency. Residents had long-standing complaints about extreme cold, damp and condensation, to the point that environmental health set up a dedicated project with the goal of protecting the health of residents. In 2011, its report found a range of deficiencies in the flats contributing to the health hazard of excess cold:

“Frequently associated with cold conditions within the flats was another hazard, that of ‘Damp & Mould Growth’ caused by condensation moisture forming on cold internal surfaces within the flats, including the window frames and the glazing. In some cases, the mould growth was chronic and severe”.

Despite environmental health’s survey of their flats, residents repeatedly requested that something be done; they had asked for the windows to be replaced as long ago as 2006. Why were those flats unfit, and how does that distinguish itself from disrepair?

As those flats were built in the 1950s, when building construction standards were poorer than today, their insulation standards were—and remain—very poor. The end walls of the flats are made of solid reinforced concrete, as are the floors, roofs, external stairways, lift shafts, walkways, balconies and possibly some of the internal walls. The cavity walling was unfilled and uninsulated. Consequently, there is constant heat loss throughout the structure of the building and instances of cold bridging in the flats on the estate caused by cold, uninsulated elements transforming heat energy and losing it externally. That causes condensation, dampness and mould growth. Those residents have been waiting for 12 years. A major estate programme has been under way for some years and still has to run until 2022, and the residents have no legal redress to deal with their concerns.

In case references to heat loss and cold bridging are a little technical, here is one example—one of many—from a resident who wrote to me from that estate:

“I have been suffering from the cold. We are always sick with flu and cold. I have my heating on 24 hours a day, with another electric heater and I am always ill, so is my son. My heating bill for this month alone was £400. My son and I have asthma. I have asthma, arthritis, fibromyalgia, diabetes, Kienbock’s disease in my hands, and I suffer panic attacks and anxiety. I am suicidal and had to go to St Mary’s hospital and see a psychiatrist, who said I must move to improve my health conditions. Please, please help.”

There is plenty of evidence to confirm that bad housing is a drain on the national health service and—as in so many other areas—if we were able to act more effectively to tackle the causes of bad housing, that would also benefit the NHS.

This week, I was pleased to take part in Parliament’s digital engagement process, and our project on housing standards received the best response so far in that important experiment. That is pleasing, although it further served to confirm the extent of the problem. We were told that 57,000 people viewed the Facebook page on which we presented our questions about attitudes to housing fitness, and some of the case studies that came in as a response were truly horrifying. Those studies came from all over the country and reflected the scale of the problem.

We know anecdotally, and from Members of Parliament, councillors and other caseworkers, just how serious is the problem of substandard and unfit housing. The English housing survey shows that three quarters of a million private rented properties—about one in six of that sector—are unfit and that about a quarter of a million social rented homes contain a category one hazard under the housing, health and safety rating system. That could relate to damp, infestation, excess cold and a number of other risks, and it means that 3 million people, including many children, have their health and safety compromised every day by substandard housing.

Local council-led enforcement is simply insufficient for the task. I have already mentioned my very positive relationship with my local authority, although it still has constraints, particularly in respect of its own housing stock. Taken across the board, however, local authorities are not enforcing more than a tiny proportion of measures to deal with substandard properties. My most recent freedom of information research, which was prepared into a report by Stephen Battersby, indicates that enforcement action is taken at a level equivalent to only 1% of all the properties that are unfit according to the English housing survey. Research carried out by Shelter about a year ago found that enforcement action has fallen by 40% in recent years. Importantly, this is not a criticism of local authorities, but the fact is that the capacity simply is not there. Performance varies hugely between councils. There is a reliance on informal action in some areas, and although that has its place and can help to resolve some problems, it makes it hard to assess the overall effectiveness of what local authorities are doing.

One concern that underpins my motivation for the Bill is that it is often the poorest and most vulnerable people—those with the highest likelihood of having disabilities and sickness—who are trapped in the worst housing, and in my experience, very few people have adequate insurance. That is a much larger problem that we must seek to resolve. A number of different remedies may be available to some people, but the minority of people who are concentrated in very bad housing often do not have access to the remedies that are available to those who are better off.

There are a number of issues in respect of supporting tenants that are outwith the scope of the Bill and on which I will continue to make representations, including retaliatory eviction. The reality is that local authorities are increasingly cash-strapped. That is one of the reasons that environmental health departments are not able to enforce. In an ideal world, local authorities would be able to fund advice services and tenancy liaison officers. I have seen some very good practice by tenancy liaison workers, including in Westminster, across the parties—when work is good, I am happy to acknowledge that. I am in absolute agreement with the right hon. Gentleman, however, that it is inadequate and patchy, which is exactly why we need to make sure that individual tenants can exercise a direct remedy in law when the other services we would all like to be in place are not up to the job.

Social council tenants do not have the same right as private and housing association tenants, who can go to the local authority, which may or may not enforce. Council tenants cannot that, and the Bill will extend to them the right to seek remedy.

As we know, the law in this area is generally outdated and restrictive. I started by saying that there is currently no obligation to ensure that the property is fit, as opposed to the obligation to deal with disrepair, and that there are therefore a range of fitness issues about which tenants can do nothing at all. That used not to be the case. The fitness obligation was set in law, but that has ceased to have effect as the law has developed over many decades.

The concept of housing fitness—of homes being fit for human habitation—stems all the way back to the Victorian era and the work leading up to the Housing of the Working Classes Act 1885. Lord Salisbury, the then Conservative Leader of the Opposition, made the case that the shocking condition of housing was injurious to both health and morals and was promptly attacked, even by The Guardian, for propagating state socialism.

The royal commission established prior to the passage of the 1885 Act proposed that there should be a simple power by civil procedure for the recovery of damages against owners or holders of property by those who have suffered injury or loss by their neglect or default in sanitary matters. That is exactly what happened. The remedy was granted to tenants, subject to what was then a relatively generous rent limit, but as time passed and laws changed, overlapped and melded together, the rent limits ceased to be updated and the ability of tenants to seek a remedy when their homes were unfit lapsed.

Eventually, the impact of that led to a 1996 report by the Law Commission, “Landlord and Tenant: Responsibility for State and Condition of Property”. The commission criticised the fact that the right of civil remedy for tenants against their landlords in cases of unfitness had been allowed to “wither on the vine”, as the rent limits had remained unchanged for 40 years. It concluded that removing the rent limits would be the preferred way to give tenants a civil remedy. Two Court of Appeal judgments supported the same conclusion.

More broadly, “Closing the Gaps”, a joint report commissioned by Shelter from the Universities of Bristol and Kent last year, concluded:

“The law relating to health and safety in people’s homes is piecemeal, out-dated, complex, dependent upon tenure, and patchily enforced. It makes obscure distinctions, which have little relationship with everyday experiences of poor conditions.”

Apart from that, I am sure it is fine.

What will the Bill actually do? The old obligations on landlords to ensure that a property is fit and not just in a state of repair have become obsolete. The Bill will therefore have the effect of reviving the fitness requirements and updating them by reference to a definition of hazards, the presence of which will determine whether a property is unfit. That list of 29 categories of hazard is set out in the housing health and safety rating system introduced in the Housing Act 2004. It will have the effect of ensuring that unfitness is covered as well as disrepair, so structural and design faults are included where they risk causing serious harm. That includes cases where poor ventilation causes severe damp or infestation, fire safety, dangerously steep stairs without protection from falls and so on. The tenant could take action against the landlord to make them put right any problems or hazards that make the property unfit and seek compensation when the landlord has not done so. The Bill makes it clear that the landlord would not be liable for any issues arising from the behaviour of the tenant or, where acting, would bring them into conflict with other legal duties.

Very importantly, the Bill is backed by the Residential Landlords Association, the National Landlords Association and the Association of Residential Letting Agents. Alan Ward, the chair of the Residential Landlords Association, possibly summed up the situation for all three organisations when he recently wrote that

“the Bill seeks to achieve what all good landlords want; better enforcement against the crooks that bring the sector into disrepute.”

Sam Lister from the Chartered Institute of Housing researched the history of attempts to improve housing fitness, dating back to Lord Salisbury, and he should get the research published because it is fascinating. Stephen Battersby, the former president of the Institution of Environmental Health Officers, has diligently prepared reports on enforcement and housing fitness over several years, and has provided invaluable advice. I also thank colleagues who have given up a precious Friday to be here.

I am genuinely thrilled to have Government support for the Bill this time around, and I hope that we can, continuing in the positive spirit of recent weeks, make good progress in passing it into law. I give thanks to the officials who have been exceptionally helpful during the preparation stage.

I want to place on the record my appreciation for Giles Peaker and Justin Bates, the housing lawyers who took the Law Commission recommendations and not only drafted the Bill but supported me through every twist and turn of it over the past two years. They are great lawyers, obviously, but they are also driven by a passion to champion people in housing need, and I owe them a debt of gratitude.

There is a great deal more to be done to turn the tide on insecurity, affordability, homelessness and housing need, and none of us will stop pressing the Minister to make progress on other fronts. But today we have the chance today to progress a Bill that will give tenants new powers to hold the worst landlords to account. I hope that we will take that opportunity, and I commend the Bill to the House.

By Dermot Mckibbin

Introduction

The Government has at long last introduced the draft Lettings Fees Bill into Parliament. The bill is about to be scrutinised by the House of Commons Select Committee that cover the Department of Communities and Local Government.

The proposals

The bill seeks to abolish letting fees completely and therefore some degree of complexity is to be expected. By virtue of section 1, a landlord must not require a tenant or prospective tenant to make a prohibited payment to the landlord as a condition of grant, renewal or continuance of a tenancy of housing in England. Similar payments or loans to third parties are also prohibited.

Section 2 imposes similar prohibitions on the letting agent. Where any payment breaches sections 1-2, it is not legally enforceable.

Schedule 1 defines payments which are permitted. Rent is a permitted payment. However, there is a long and complicated definition of when a rent payment is not permitted so as to prevent an agent loading fees on to the rent.

The Bill caps tenancy deposits at no more than six weeks’ rent, and caps holding deposits at no more than one week’s rent and requires holding deposits to be returned to tenants. Where the tenancy agreement allows the tenant to be charged for breaking a term of the tenancy agreement, this is allowed.

The enforcement for breaches of sections 1-2 will be by trading standards officers. The burden of proof will be beyond reasonable doubt. The maximum penalty will be up to £5,000 subject to the council’s discretion. Repeat offenders can be fined more.

Criticism

There is nothing in the bill to require lettings agencies to register either with the local authority or any other trade association. This is a major omission as the quality of letting agencies is very variable. In Wales the Labour Government requires all private landlords and lettings agency to register with a government agency and to obtain a licence with compulsory training.

The Government assumes that any obligation in the tenancy agreement that requires the tenant to carry out any obligations will be lawful. This is obviously not the case. There is nothing in the bill to deal with scenarios where the landlord fails to carry out their part of the tenancy agreement.

The Government has ignored the work done by the Office of Fair Trading in outlawing certain contract terms that are contrary to the unfair terms in consumer contracts regulations. This a major error as some agents will seek to recoup prohibited fees by imposing punitive clauses in the tenancy agreement.

It is doubtful that a tenant will co-operate with a local authority’s investigation if they have no security of tenure. Tenants will need expert legal advice to understand the bill. Such advice is in short supply due to cuts in legal aid.

A separate lead enforcement body is to be set up to oversee the enforcement role. This is an error. The government body that has the most contact with the private rented sector is the local authority.

The government is relying on trading standards officer to be the enforcement body. However, a freedom of information based survey found that over 93 % of councils in England had yet to issue a legal notice on lettings agencies for failing to display their fees. This has been the law since 2014. Local authority budgets have also been stretched to breaking point in recent years.

In Conservative areas, public questions should be tabled at council meetings to expose the failings of the council to enforce the legislation whereby all letting agents are required to display prominently their fees. Constituency parties should conduct surveys of lettings agencies to find out whether they display their fees. The results of the survey could be press-released to the leader of the council.

Labour councils need to copy the excellent work by trading standards officers in Camden and Islington. In Hackney the council has written to all letting agents to ask them to stop charging fees in advance of the bill becoming law.

Local Labour parties need to campaign on private rented housing. Jeremy Corbyn is correct to raise the state of private rented housing as a political issue. The Tories are clearly on the defensive on housing.

It may be a fool’s errand to join the argument about one of London’s major ‘estate regeneration’ schemes. In most of the big schemes it has been almost impossible to distinguish fact from fiction amongst the contradictory claims made by proponents and opponents with equal belligerence. But this time it is Haringey, where I worked for many years in Tottenham, so this one feels personal.

The passions unleashed by Haringey’s decision to set up (with LendLease) a 50/50 joint venture development vehicle (known as the HDV) is exemplified by two respected journalists – I normally like their stuff – who have taken opposite sides. Guardian economics columnist Aditya Chakrabortty is against (here and here) and ex-Guardian writer and London blogger Dave Hill is for (here and here). Not only are they poles apart, but they have become vituperative, and seem to have different facts let alone opinions.

Not just in Haringey, ‘estate regeneration’ is becoming the trickiest political issue for Labour in London. On the one side there is a genuine argument (articulated here by Shelter amongst others) that national policy means there is a dearth of options, and that redeveloping lower density and ‘worn-out’ estates on council land to create additional and better housing at much higher densities, mostly at market prices, is the only way of providing sufficient cross-subsidy to enable some social rented and other ‘affordable’ homes to be built. The argument goes that this is better than nothing and that we can’t hope and wait for a Jeremy Corbyn government to come along to get more resources.

On the other side are those who see the policy as an echo of David Cameron’s clarion call in 2016 for the redevelopment of 100 council estates, places he called ‘sink estates’, ‘bleak high-rise buildings’ that ‘are entrenching poverty… isolating and entrapping many of our families and communities’, ending with his ominous sentence ‘I believe that together we can tear down anything that stands in our way’. It is axiomatic that any policy initiated by David Cameron won’t be good for the poor. But Labour councils are accused of adopting similar attitudes, wanting to build glossy new ‘quarters’ and failing to protect their vitally important social rented stock and working-class communities. There are now believed to be well over 100 potential schemes around London. In London housing terms, this is huge.

In Haringey, two polarised sides line up behind the conflicting perspectives. Proponents see the HDV as a transformative investment vehicle that will create jobs, fund a range of community facilities and services, transform the council’s commercial portfolio, and directly tackle the housing crisis, homelessness and bad housing – whilst making big money (profit from development, increased council tax and New Homes Bonus income) for a cash-strapped council. All councils setting up joint venture or Local Housing Companies face similar dilemmas, as discussed by Ross Fraser on Red Brick last week.

Opponents see a fundamentally gentrifying process that will knock down thousands of genuinely affordable council homes and build thousands of homes that will be mainly unaffordable to existing Haringey residents, adding up to the destruction of communities and ‘social cleansing’. The argument goes that adopting regeneration/redevelopment as a means of coping with huge cuts in revenue support grant means that councils are effectively mortgaging the future by making a profit from the land they own, rather than maximising its use for genuinely affordable housing. The opportunity cost is that the land, once developed for this purpose, will no longer be available for a better purpose in the future. The alternative would be to develop more modest and less grandiose plans to build homes on spare land and invest in the existing estates.

Leaving aside the political controversy over councillor selections and whether a 50/50 joint company is privatisation (about which I have opinions but not for this piece), what are the likely outcomes of the HDV in housing output terms? The council has made big claims that the HDV will tackle homelessness and waiting lists. Its HDV webpage starts ‘Our residents need new homes to tackle the rising cost of housing and increased homelessness’. The council seeks the higher moral ground – Alan Strickland, the Cabinet Member for Housing and Regeneration, responded to opposition from local MP Catherine West by arguing ‘We need action now to help the three thousand families in Haringey in temporary accommodation, and the thousands more on our waiting list’ and there have been attacks on opponents for not caring about delivering homes to the homeless for ideological reasons.

It is incumbent on the council to demonstrate that the HDV will achieve these aims, not merely to assert that it will. There certainly seems to be a weakness in the evidence. I have read most of the confusion of documents that make up the HDV proposal, and I am none the wiser on this central question: how exactly will the HDV aid homeless people in Haringey, and how many? Thousands of mainly social rented homes will be knocked down and thousands of mainly private homes will be built. There will be many more homes overall, but, how will the proposed mix of market and sub-market homes tackle homelessness and the needs of people on the waiting list?

The missing number is how many social rented homes there will be at the end of the process. It has been a constant refrain on Red Brick that the type and tenure of new homes is as important as how many homes are built in total. Social rent remains the only truly affordable option for many people on lower incomes, a line of argument that, after a barren few years, is once again becoming common currency in the housing world. Of course, other forms of housing are needed, because housing unaffordability now stretches a long way up the income scale, but in my contention housing policies are unacceptable if they do not improve the chance of a decent home for people in the bottom 10-20% of the income distribution.

Haringey’s own housing market assessment illustrates the point. 30% of the borough’s households have incomes below £20,000 per annum, 50% below £30,000 and 65% below £40,000. Market housing does not meet their needs, and sub-market options only help at the edges. Only 4% of households have incomes above £100,000 per annum. Haringey is not a borough of affluent people just waiting for someone to provide a £700,000 flat for them to buy. Mean household income levels are highest in the West of the Borough and lowest in the East – where most of the estates to be regenerated are situated.

Whatever the wider benefits of HDV, in housing terms the council has not committed to the full replacement of all its social rented homes, let alone a much-needed increase. They have committed to providing existing tenants with a right to return on the same terms as now (rent and security of tenure) but no estimate is made of the number of homes needed to achieve this. I would have thought it was crucial to model this before decisions were taken – some people are keen to return but others prefer one-off permanent rehousing or choose to stay where they have gone temporarily and do not return.

The council’s housing strategy sets an overall aim that 40% of new homes should be ‘affordable’ and it has adopted income-related affordability measures. That is across all development on private and public land and across the whole borough. On council-owned land the proportion of ‘affordable’ homes should be highest, but there appears to be no explicit aim or target or even expectation as to how many of the new HDV homes will be for ‘social rent’ or even ‘similar to social rent’ on an income-related calculation. The council also has a policy (misguided in my view) of not maximising the number of homes for social rent in the east of the borough, in Tottenham, on grounds of achieving a better social and tenure mix. This also has the effect of depressing the number of homes for social rent.

The evidence available suggests there will be fewer homes for social rent at the end compared to the beginning. Surely it is a basic principle that there should be full replacement of all social rented homes knocked down? Sadiq Khan’s decision to refuse permission for Genesis’s Grahame Park regeneration in Barnet due to the loss of social rented homes demonstrates two points: first how unambitious social housing agencies have been in trying to build for the poorest, and secondly, that the mood is shifting against them. Khan described it as “how not to do estate regeneration” and his own London Plan policies indicate that he would also turn down Haringey’s plans as they stand.

There is a further impact on those in housing need waiting for council homes that is not assessed in any of the HDV documents I have seen. The regeneration process is long and complex, and involves rehousing (‘decanting’ in the jargon) all existing tenants (temporarily with a right of return or permanently for those who do not wish to return). Demand from decants restricts the flow of social rented homes from the general pool to those in housing need, even if the redevelopment programme is carefully phased (eg by building on spare land first). Because they are on the critical path of a major development where delay is costly, decants tend to receive high priority and get first pick. Not only do fewer other people get rehoused, they also tend to get homes which are poorer quality.

Haringey’s housing vulnerability is demonstrated by its own Annual Lettings Plan. This shows that the borough had 3,158 households in temporary accommodation at March 2017 with a further 9,220 households on the housing register. The number of new lettings available to the council has been falling for many years: in 2016/17 it achieved only 522 lettings to meet all forms of need and in 2017/18 only 490 lets are anticipated, with 60 ‘regeneration decants’ amongst those afforded highest priority. The Plan already foresees the share going to homeless households declining from 62% to 34% in a single year.

Supply and demand in future years is not projected, but the number and share going to decants is likely to rise rapidly with the HDV. Far from improving, the prospects for homeless households and people with other urgent housing needs being rehoused will diminish sharply. It will be many years before the regenerated estates make a net contribution to the lettings pool, and it may never happen. I would hazard a guess that Haringey, like some other boroughs, will decide to discharge its homelessness obligations through the private rented rather than the social rented sector. Far from helping the homeless, the homeless will be the primary victims of the decant programme required for the HDV.

As we have seen, so far Sadiq Khan is sticking to the line that projects on this scale must not lead to the loss of social rented homes (although there are still concerns about the definitions that Sadiq is using in the new London Plan). There will be pressure on him to back off but I hope he sticks to his guns, based on past evidence. (see box).

A 2015 GLA study of what actually happened in 50 past regeneration schemes found that they achieved more homes, more market homes, more intermediate homes, but a reduction in social renting.

It is clear who has benefitted from a doubling of density. Not people on the lowest incomes, but people wishing to rent at higher but sub-market rents and, overwhelmingly, people able to pay the full market rate. From the evidence of the GLA report, it is hard to avoid the conclusion such outcomes constitute ‘gentrification’ – ie on average the people residing there after regeneration are significantly richer than those who lived there before – and poorer people are both fewer as a proportion and in number. Some people think this is a good thing, often on a ‘social mix’ argument that I find wholly spurious. In the schemes looked at by the GLA, over 8,000 social rent homes were not replaced, meaning that 8,000 other households (homeless and waiting list) did not get a home at all. The real housing cost of the schemes was borne by these families – regeneration has been paid for by the homeless and badly housed.

Whatever view you take about reselection and about development vehicles like Haringey’s, in simple housing terms the claim that it will help meet the needs of homeless and waiting list households does not bear much scrutiny. The housing case for the HDV has not been made.

What can we learn from the research about the opportunities that LHCs provide? How can we evaluate the likely impact of LHCs in helping to solve the housing crisis? Why do concerns remain regarding the role of LHCs?

What are local housing companies?

LHCs are intended to act commercially for a social purpose. The primary purpose of most LHCs is to directly develop or acquire new local housing supply – whilst making a return for the local authority. Profit that might otherwise go to developers can instead be captured by the authority and recycled to help maintain core services or reinvested in further housing provision.

For some councils, the LHC is intended to complement new provision via the Housing Revenue Account (HRA). For others, LHC development is a substitute for HRA-funded development. For stock-transfer authorities, without an HRA or a housing team, LHCs are an alternative to reopening an HRA.

There are essentially three forms of LHC – wholly-owned by a single authority (the majority), multi-authority owned (such as the North Essex Garden Communities LHC), or a joint venture (JV) between a council and either a housing association or a private developer (such as the Haringey/Lendlease Development Vehicle (HDV)).

The nature of council investment in LHCs varies, but the following approaches are being adopted:

Using HRA (if this doesn’t conflict with the HRA ‘ring fence’) or general funds to meet ‘start-up’ costs and capitalise the LHC

On-lending Public Works Loan Board (PWLB) borrowing – at a return to the authority

Equity investment in the LHC

Sale or leasing of land

LHCs also offer councils additional New Homes Bonus and council tax. For example, LB Newham expects its LHC (Red Door) – focused on new build for intermediate rent – to deliver an extra £18m council tax (by 2028) plus £17.5m in Community Infrastrucuture (CIL) funding and a direct return once it becomes profitable (within the next 5 to 10 years). Some of the larger LHCs – primarily JV LHCs – have attracted private finance and have established ‘revolving investment’ funds.

Most LHCs are, initially, focusing on developing council-owned land, which might otherwise have been sold to a developer or housing association or developed directly via the HRA. Some are seeking to channel section 106 ‘planning gain’ opportunities, previously offered exclusively to housing associations, to their new LHC.

What new opportunities do these companies provide?

The intention is for LHCs to intervene in local housing markets to compensate for slow or insufficient new supply by developers or housing associations, to undertake specialist provision where this is urgently needed and to disrupt the local private rented sector and in doing so stimulate PRS improvement by offering private lets at higher standards, better terms and greater security.

LHCs are frequently intended to enable authorities to exert a greater stewardship role in place-making. They can undertake new build on smaller sites or in areas currently unattractive to developers and housing associations, with the objective of raising land and property values and making the area more attractive for private investment.

As John Perry of CIH has recently pointed out, “most of the LHCs have been set up since the government reinvigorated the right to buy (RTB), emasculated the HRA and undermined its own self-financing settlement”.

LHC development is attractive because it appears to avoid issues limiting development via the HRA, such as stock loss via RTB, limits on the recyclability of capital receipts from future RTB sales, etc. and controls over borrowing. As LHCs can offer assured shorthold lets, rather than secure tenancies, they enable authorities to offer private rented accommodation at profit.

LHCs are also seen as flexible and dynamic organisations, less constrained by shareholder profit expectations than developers and thus more able to invest counter-cyclically, be flexible over the timing of profit-extraction, ‘flip’ new homes between tenures to meet changes in demand – all whilst acting as a direct instrument of a council’s housing and planning strategy.

What impact might the companies have on solving the housing crisis?

The Smith Institute estimates that, based on current business plans, LHCs could build up to 25,000 new homes by 2022. The scale of ambition varies – RTPI research indicates that some LHCs (notably in rural areas) are planning to provide less than 50 new homes per annum whilst others plan to build more than 1,000 per year within five years.

Provision of 25,000 new homes over five years would be a significant increase on output expected from stock-retaining councils via the HRA. The Smith Institute estimates future council supply at c2,000 homes per year (using DCLG construction statistics) but CIH and the UK Housing Review estimate future provision at c3,000 homes per year (using the more reliable DCLG affordable housing statistics).

However, the real extent of net additional supply is more difficult to determine. Where an LHC develops on HRA land or uses HRA resources or acquires property via section 106, then the new LHC homes will not necessarily be ‘additional supply’ to what, for example, housing association partners might otherwise have delivered.

The area where the ‘additionality’ of LHC provision is least contestable is where it focuses on the PRS. For example, LB Newham set up Red Door Ventures to build 3,158 new PRS homes over the next six years (mainly on council-owned land).

If LHCs can increase PRS provision and change the culture of the local PRS market – by offering higher standards of management and maintenance plus improved security of tenure – this may (in my view) be their most significant legacy.

What ongoing concerns arise from the research?

The Smith Institute takes an overwhelmingly positive approach to LHCs. This is understandable, as the research suggests that LHCs offer councils a ‘triple dividend’ in the form of much-needed extra housing, greater impact in place-making and a financial return to the council.

In any terms, this is an impressive manifesto for LHCs and the sponsoring authorities should be congratulated for their initiative, pragmatism and vision. However, concerns remain about the practical application of the LHC model. Some of these are referred to in the report – others reflect concerns expressed more widely.

Only around 10% of new LHC supply will be for social rent

The fact that many of the LHCs are in London and the South East reflects the underlying business model of most LHCs – recycling receipts from market sale or revenue from intermediate or market rents – to cross-subsidise ‘affordable’ housing provision. In this sense, LHCs operate exactly like housing associations.

Following this model may boost overall new supply, but Smith Institute research suggests that whilst 30-40% of LHC homes are likely to be ‘affordable’, only around 10% (i.e. between 25% and 33% of the ‘affordable provision’) will be for social rent. Given the cross-subsidy model, it is difficult to see how a higher proportion of social rent can be provided by LHCs.

In its recent report, Building Bridges, CIH estimated that if the housing crisis is to be tackled in a balanced way, around 33% of new supply needs to be at a social rent. Current LHC projections fall well short of that target.

NHF figures show 38,082 housing association completions in 2016/17 of which 12% (4,775) were social rent – 75% delivered using cross-subsidy. Perhaps housing associations are not performing so badly after all?

Where is the next generation of social rented housing going to be built?

John Perry of CIH has expressed concern that if LHCs do no or very little social rent they may use up council land that might have produced 100% social rent if it had been developed through the HRA. He also points out that by building outside the HRA (where one exists), LHCs are denied the ability to pool rents, thus limiting their ability to dampen rents for new homes.

The provision of council-owned land at less than market value is a vital subsidy towards the provision of social rented housing. So, if scarce council land is being used for LHC development – where exactly is the next generation of social rent housing going to be built?

Does LHC governance demonstrate an accountability deficit?

As most of the LHCs are still in ‘start-up’ mode, their directors tend to be council officers, often reporting directly to the council chief executive. Some LHCs have also appointed local politicians as directors, but this has been limited by concerns over future conflicts of interest in respect of planning permission.

Whereas ALMOs – an earlier variant of LHC – adopted a transparent approach to governance, involving resident and independent board members, most LHCs have yet to address the issue of accountability.

Reading the Smith Institute research, it appears that only a few LHCs have community representatives on their boards or a formal detailed strategy for community engagement. And, as the Haringey HDV controversy demonstrates, LHCs which are not publicly accountable risk the loss of public and political support.

What is the risk of government controls over LHCs?

LHC business plans are vulnerable to the risk that the government interferes in the regulatory framework. Senior figures in local government have told me that that there is less concern that the government will insist that LHCs apply the RTB and greater possibility that, if any LHCs fail, controls will be imposed to limit borrowing or to place limits on what wholly-owned LHCs – as distinct from joint-venture LHCs – can do.

Will LHCs have the capacity to build at scale?

Most of the LHCs are in ‘start-up’ phase, managed directly by council staff with the assistance of consultants. Most have yet to recruit managers with direct development experience and these skills (particularly in the LHC heartland of London and the South East) are expensive and in short supply.

The risk is that authorities and their LHCs lack the commercial and technical skills to develop at scale and at pace and/or that LHCs fail commercially – for example sales receipts or rental surplus are insufficient to repay their borrowing.

Privately, senior figures in local government concede that this skills deficit is the biggest risk to LHC effectiveness and that only a proportion will be able to build at scale. One of the key recommendations in the Smith Institute’s well-balanced report is that a centre of excellence is established to support the development of LHCs – perhaps managed by the LGA.

LHCs are only part of any local solution to the housing crisis

There is much to commend in the pragmatism and ambition of those authorities setting up LHCs. They have the potential to transform areas of low demand, secure a better mix of housing tenures and products and improve standards and security in the private rented sector.

However, under the current cross-subsidy model, LHCs can only provide limited assistance to people in the greatest housing need.

This means that solving the housing crisis still requires a major social rent contribution by housing associations – underpinned by increased levels of grant.

Equally, the government (or more likely a future Labour government) needs to relax its controls over the HRA to enable stock-retained authorities to harness the remaining HRA asset base to provide social rented housing, and to reduce RTB discounts and allow councils to retain 100% of RTB capital receipts.

A future Labour government would, of course, be wise to follow the lead of the Scottish and Welsh administrations and abolish RTB entirely.

Of course there are a few things to welcome. Some lifting of the appalling burden of getting onto Universal Credit. More money for the housing infrastructure fund and a proposal to raise the borrowing caps on local authority housing revenue accounts (but they will have to bid for it). And more money for Grenfell victims and for the surrounding estate.

There are some mysteries still: the £2 billion extra for ‘25,000 council houses’ announced by Theresa May in her Conference speech is now described in the government’s Budget ‘Red Book’ as 25,000 additional affordable homes, which could mean anything. There are still vague promises to ‘look at’ bids for extra money to pay for additional fire safety measures, but no hard cash given to anyone who has asked so far. There is a ‘Land Assembly Fund’ but no clarity yet about who will assemble it and for what purpose. And veteran back room thinker Oliver ‘two brains’ Letwin is going to be let loose again trying to work out why planning permissions don’t get ‘built out’ and turned into real homes. There will be more unspecified planning reforms, as if we haven’t had enough, but no mention of getting rid of the ‘viability tests’ used everywhere to help developers get out of commitments to affordable homes. There are ideas for changing the Community Infrastructure Levy arrangements but they don’t at first sight seem enough to tackle the issue of land value uplift, and another consultation will ensue.

Then there is the plain daft. On top of the already announced extra £10 billion for the inflationary ‘Help to Buy’ scheme, there is to be a reduction in stamp duty aimed at first time buyers. Yet the government’s own forecasters say that the main effect of this will be to put up prices and that the primary beneficiaries will be, not first time buyers, but existing home owners. Never has so much been spent in a totally counterproductive way.

In the middle of all this demand-side nonsense, the Red Book has a little essay on the importance of housing supply and its beneficial impact on what is now seen to be the key economic problem of poor productivity. It’s worth quoting: Box 5.1:

Housing supply and productivity

Increasing the supply of housing in the right places brings productivity gains. It supports flexible and responsive labour markets, enabling people to work where they are most productive, and allows successful towns and cities to become even more productive by realising agglomeration economies.

Expanding the stock of housing in urban areas can lead to agglomeration benefits where it increases the density of economic activity. Studies find larger cities boost productivity: doubling a city size or density increases productivity by 3 to 8%.

Increasing housing supply guards against macroeconomic instability. House prices tend to rise faster in environments with lower responsiveness of new housing supply. Cross‑country studies show that lower house price variability is associated with lower variability in inflation, interest rates and real incomes.

On supply, the Chancellor has played the numbers game again. Now they’re committing to build 300,000 new homes a year by the mid-2020s. This figure, plucked out of thin air it seems, is so far in the future that it is of almost no value as an operational target.

You would expect that such a figure would be backed up by meaningful housing supply initiatives which might get us up towards that kind of figure. Instead there is more tinkering with planning: intervention where councils have not agreed plans, the use of land ‘outside the local plan’ if it is to be used for discounted homes for first time buyers, greater housing density in urban areas, and easier conversion from commercial and retail use to residential. Plus some fiddling about with investment rules, the land assembly fund (beware – it’s about ‘private developers and strategic sites’), garden towns (AGAIN!!).

And on affordable housing: ‘The government has already shown its commitment to increasing the supply of affordable homes’ (pause for laughs) citing the extra and currently undefined £2b, a promise to raise HRA caps (through a bidding process), more loans for estate regeneration (not sure about that one either).

And don’t forget the homeless. Well, they nearly did. After Boris Johnson failed to meet his promise to end rough sleeping in London by 2012, the government is now promising to halve it by 2022. If they achieve that, which has to be doubted, they will be back to the level they started with in 2010. And there will be three ‘Housing First’ pilots (three!).